New Zealand Credit Law Bulletin - Vol 2, No 2, March 2002
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: nz-bulletin-join@mailman.hattaways.com
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Not "ordinary course of business" after legal threats
- Was Deadline Typesetting within deadline?
- Receiver selling at a proper price
1. Not "ordinary course of business" after legal threats
Charles R Thomas & Associates Ltd. v Oorschot (2001)
Thomas & Associates are architects who were instructed by Stella Pacific Ltd, a developer, to provide design services for several large-scale housing projects in Whitby and Albany. Thomas tendered invoices to Stella for the work but were having difficulty getting paid. They made a series of telephone calls over many months demanding payment. Stella promised to pay many times but they reneged on agreed payment schedules every time.
Finally, Thomas' lawyers sent Stella a letter threatening legal proceedings. The letter partly achieved its objective as it led to a payment of $19,210.75 in May 2000. However, a balance of $25,683.75 remained outstanding. Three months later Thomas issued a statutory demand under s 289 of the Companies Act. The demand was for the balance due and if Stella refused to comply, it would be presumed to be unable to pay its debts (s 287). Liquidation proceedings would normally follow. That demand was met by an application by Stella to set it aside.
Ultimately, the application to set aside the statutory demand was compromised. Stella agreed to pay the full sum claimed in the demand by way of two equal payments, the first in September and the balance in October 2000. The first payment was received by Thomas on 12 September. The balance was never paid and as a result of a special resolution of shareholders on 17 October, Stella was placed into voluntary liquidation.
As the September payment was made within the restricted period the liquidator issued a notice setting aside the payment as a voidable transaction. Thomas applied to the Court seeking to have this notice
overturned. They argued that the payment was not voidable as it had been made in the ordinary course of business (s 292(2) and (3) of the Companies Act 1993).
The Court noted that a payment made in response to a threat of legal proceedings may take the transaction out of the ordinary course of business. However, the authorities have shown that each case is to be determined on its own facts. In this case, the Court said that the numerous telephone calls and solicitor's correspondence when taken collectively, and particularly in reference to the issue of the statutory demand, were evidence of an increase in the pressure on Stella. Furthermore, Thomas had never issued a statutory demand before and the amount outstanding was considerably larger than Thomas' other bad debts. This confirmed for the Court that the September payment had been made other than in the ordinary course of business. So Thomas' claim to have the payment stand was denied and they had to return the money.
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2. Was Deadline Typesetting within deadline?
Deadline Typesetting Ltd v Fuji Xerox New Zealand Ltd (2001) 9 NZCLC 262,629
Deadline Typesetting Ltd leased a digital print machine from Fuji Xerox which it used to produce farming diaries for Precision Publications. A dispute arose between
Deadline and Precision. Deadline thought the problem had been caused by the glue used in the manufacturing process. The glue had been obtained from Fuji Xerox. Precision refused to pay Deadline for the diaries.
Because of the difficulties experienced with the print machine Deadline stopped making the lease payments due. The parties were able to settle that dispute but the next day (11 December 2000) Fuji Xerox served a statutory demand on Deadline, claiming an amount of $105,050.75 owing for materials supplied, including the glue. Deadline considered that it had a counterclaim for $87,631.40 that it was unable to recover from Precision as a result of the defective glue. On 4 January 2001, Deadline filed and served an application to set aside the statutory demand on the grounds that there was a substantial dispute as to whether the amount was owing and that it had a counterclaim. Fuji Xerox argued that the application was out of time.
Section 290(2) of the Companies Act 1993 requires that the application to set aside must be made and served on the creditor, within 10 working days of the date of service of the statutory demand. "Working days" are defined in s 2 of the Act as excluding Saturdays, Sundays and the period from 25 December to 2 January inclusive. So the tenth working day actually expired on 3 January 2001 but the High Court was closed on that day. This made it impossible for Deadline to file and serve their application.
However, the Court explained that Parliament had set a strict time limit of 10 working days, to allow the debtor to have time to take legal advice and to make its application when law offices and the court were open. To ignore the fact that the Court was closed on 3 January would have denied Deadline the 10 working days that Parliament has determined ought to be provided. If the time for making an application expires on a particular day and it is practically impossible make that application because the Court is not open, the time will be extended to the next working day. Deadline's application was held to be within time.
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3. Receiver selling at a proper price
Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448
Wanaka Leathers was in receivership in October 1987 and was sold to a subsidiary of Moritzson. Moritzon retained ownership of the land but sold the tannery business to Quality Tanning. The purchase was financed by a loan, secured by debenture, from another subsidiary of Moritzson. By early 1990 Quality Tanning was in default under the
loan. The company was restructured, with the Moritzson group taking a majority shareholding. As Moritzson was anxious that Quality Tanning should continue to trade, it injected a further $300,000 of new capital into the business. Working capital of $140,000 was obtained by loan from Westpac. The loan was secured by debenture and a chattel security over major items of plant.
The company continued to experience financial problems after the restructuring. On 13 November 1990 the directors agreed that Quality Tanning would give a debenture to Moritzson, to secure all advances. This debenture ranked after the first debenture to Westpac. Quality Tanning's financial woes continued and following an application to wind the company up, Westpac appointed McLauchlan as receiver on 24 December.
McLauchlan made the decision to continue trading in an attempt to sell the business as a going concern. He thought this was the best way to achieve the full value of the company. However, no interest was shown and the plant was closed with the assets put up for sale. By mid-1991 the assets were sold to Colonial Leathers but a shortfall in the receivership remained. The funds received were sufficient to pay off the chattel security and a small amount was ultimately paid to Westpac in mid-1995. Moritszon then sued the receiver for the difference between the amount required to satisfy the Westpac debenture and the amount Moritzson claimed would have been obtained if the assets had been properly marketed.
The Court said that to establish lack of good faith by the receivers it wasn't enough just to show that a higher price might have been obtained if the sale had been put off or speeded up. Some unreasonable material shortcoming in the sales process would usually be necessary. A receiver must still act in the best interests of the mortgagee but did not owe a general duty to secure the best outcome for anyone else affected, so long as he was acting reasonably in trying to obtain a proper price.
Moritzon could not show that the value obtained by the receiver was less than that reasonably available. Furthermore, the Court could not infer from the history of the sale that the receivers had failed to take reasonable precautions to achieve a proper price. So Moritzson's claim failed.
